Alumni Feature- Brendan Hughes (’12) | PLANNING YOUR FUTURE

Retirement Planning

Hello, my name is Brendan Hughes, a 2012 JMU graduate that majored in finance and accounting. When I started at JMU, I decided on the accounting major truthfully because my dad told me that there would never be a shortage of jobs in this field. Just like nearly every other 18 year old in the country, I was quite unsure as to what I was looking for in a career. It was not until my junior year when I was taking intermediate accounting and tax that I realized that my passion was not in the accounting field (certainly nothing against the professors!). I decided to pick up the finance major that year which may have been the best decision I ever made (other than choosing to attend JMU). I went on to work at Primatics Financial (a software financial company founded by a couple JMU graduates in the Tysons Corner area that eventually sold to SS&C Technologies) as an analyst evaluating loan portfolios for some of the largest banks in the U.S. and Canada. I did this for three years and concluded that I really wanted to be more involved with the investment side of businesses. I moved on to Lafayette Investments which is where I currently reside. I work as an investment advisor for high net worth individuals with a primary focus on researching publicly traded equities. I am involved in the investment decision-making process and also manage client relationships. Lafayette currently has approximately $400 million in assets under management. I wake up every day genuinely excited to scour the landscape for undervalued investment opportunities.

Cheering on the Dukes with some friends at College GameDay!

In addition to my work at Lafayette Investments, I serve as a member of the JMU GOLD Network (young alumni Board of Directors) and the Cystic Fibrosis Foundation’s 2017 Maryland’s Finest campaign (a select group of individuals who have demonstrated leadership in the community and excelled in their profession that serve as ambassadors for the CF Foundation). In the past I have served on committees such as the Primatics Cares Committee (designed to raise money and awareness for various charitable organizations). My interest in travel spawned during my study abroad program while at JMU. I am also currently working on writing a book documenting my global adventures and discussing the economics of various countries. Having passed the first 2 levels of the CFA Exam, I hope to complete the program soon.

Promoting the GOLD Network on campus at JMU!

I consider myself to be very fortunate in that I have the opportunity to work with clients in a financial context on a daily basis. Investment advisers get to see it all when it comes to monetary dealings. From clients that invested in start-up pharmaceutical companies that multiplied 100-fold to ugly divorce settlements that have brought individuals to the brink of insolvency, not a day goes by where I don’t feel like I am getting a tremendous learning experience. There is one constant theme that has stood out since I started full time in the money management business: an individual always needs more money than they think in retirement. The first year is a real eye opening experience for nearly all recent retirees when the checks stop coming in and withdrawals are made from retirement accounts. That is the moment when most individuals realize how much money it costs to keep them going and it is an unpleasant situation more times than not. I am going to do everything in my power to ensure that I can provide for my family and meet all of my personal retirement goals without the undue stress that many put themselves in by not planning ahead.

According to the Economic Policy Institute, nearly half of families in the United States do not have any retirement savings. Possibly an even more astounding statistic is that the median retirement savings for all U.S. families is $5,000! Here are some tips for retirement planning to help ensure that you do not wind up being a part of the very depressing current state of American personal saving. This is by no means an all-inclusive list but if you stick to these core practices, the odds of being set up well for retirement will be far more heavily weighted in your favor.

Tax Efficient Accounts

The tremendous advantages that 401k plans and IRA’s offer simply cannot be overstated. This is one of the very few financial gifts that the government serves to individuals on a platter so make sure that you are maximizing the value! Just think about this situation: a personal investor deposits $5,000 into an IRA. IRA accounts provide for tax deferred saving assuming that the investor does not withdraw funds prior to reaching age 59.5 (premature withdrawal results in an additional 10% tax penalty on top of standard withdrawal taxes). Over a 20 year period the investor averaged a return of 7% which allowed the account to grow to $16,479 assuming a 20% tax on withdrawal at age 59.5 (IRA’s often have higher tax rates at withdrawal but just keeping this rate constant for simplicity). The IRA has substantial advantages over an individual account which would accumulate far less over the same period of time. Assume the same investor averaged the 7% return over the 20 year period but made one large investment every five years and sold the investment at the end of that period. The 20% capital gains tax would be realized upon sale of each security and not when the funds were withdrawn as was the case in the IRA example. These investments in the account without the tax deferred benefits would amount to $15,274 at the end of the period. This $1,205 difference in return between the accounts is only magnified as wealth builds over time and the investor uses the incredibly powerful tool of compound interest to their advantage. The tax deferral over long periods of time provides a huge savings to individuals even when IRA withdrawals are taxed at ordinary rates.

Automate

This concept may be incredibly simple but I would highly recommend automating the savings process as much as possible. While some of us focus on controlling the mental accounting bias (where an individual mentally separates different sources of income into separate accounts instead of thinking of all income in the context of a total portfolio), most think of their salary as current income and in doing so have a greater tendency to spend on items that are a want and certainly not a need. An easy solution to this common problem is to automatically deduct 10% of your monthly paycheck and have the contribution placed into a 401k (or another retirement vehicle) account. This will require preparation of a detailed budget for most, as this is no small task but it will provide substantial benefits to the individual over the long-term in the form of increased wealth. The 401k account will compound in a tax efficient manner as was the case with the IRA in the example above. Some companies will provide further upside for 401k accounts by matching employee contributions up to a certain threshold. I would encourage shooting for the 10% contribution benchmark regardless of where the employer matching threshold lands.

Invest Extra Income

While automatically placing 10% of your paycheck into a 401k account is a good place to start, there should be a further focus on investing any additional income that is leftover after meeting monthly living expenses and making loan repayments. For the average individual that does not have expertise in active money management and does not have the luxury of dedicating their life to seeking out undervalued individual securities, incrementally deploying capital into index funds over time (and when possible allocating this money to IRA accounts) will prove to be an effective strategy. Since 1900 and including the reinvestment of dividends, the S&P 500 increased 9.71% annually through the end of 2016. A $1 investment would have grown to $51,406 over that time period. Equities have significantly outperformed bonds over time so it is my opinion that wealth should be heavily biased towards equity investments. I should mention that individual’s should only be placing money into the equity markets if they have a long-term time horizon. If there is a thought that money could be needed in the next two years for a down payment on a home, this money should absolutely not be put to work in the stock market. It is impossible to predict when the next steep drop in the market will be (if people knew when this was going to happen then wouldn’t everyone sell out prior to the crisis?) and you most certainly do not want to be in the position where required to liquidate assets near the low point of an economic cycle or worse yet a financial crisis. It is also extremely important to understand the concept of expected returns over time. Expected returns should always be looked at in relation to the available risk-free rate. With what has recently been a near-zero (and in many locations in the world a sub-zero) interest rate environment, a 10% annual return on investments should not be viewed as sustainable given the wide discrepancy between the risk-free rate. As we have experienced prolonged periods of historically low interest rates (and some expect this trend to persist), many believe that it would be delusional to continue to expect the same returns on investment going forward. I would take the conservative stance on this topic (as is usual in my business) and would plan for approximately a 6% average annual return on invested capital in the public equity markets going forward. It is always better to plan for the worst and have a surprise to the upside than the other way around.

Monitor Net Worth

This may also sound like a very simple point but I find it to be quite helpful. The first task that I complete each day is to make sure my credit card bills are paid and to check on the balances of my investment accounts (and my client accounts since I am managing wealth for other high net worth individuals). Just like seeing the daily progress after going to the gym each day, having that daily snapshot of where you are financially can provide further incentive to increase saving. Maybe you will find yourself a little more hesitant when considering buying those expensive designer pants on the next trip to the mall when that money could be compounded at a conservative estimate of 6% per year on a tax deferred basis!

Brendan mixes adventure with his passion for investing. This is a rare view overlooking Machu Picchu.

I hope this brief retirement planning overview was helpful! If you have any questions feel free to reach out to me at bhughes@lafayetteinvest.com. Thank you!

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Brendan is a James Madison University graduate (’12). He serves as an Investment Advisor at Lafayette Investments where he patiently seeks contrarian investment opportunities with a primary emphasis on public equity. Brendan mostly focuses on security selection but prides himself in adding value to clients through other avenues such as tax planning, investment strategy, and even recommendations on items such as credit cards. He seeks to continue to grow his client base at Lafayette Investments over the coming years. Feel free to contact him at bhughes@lafayetteinvest.com in regards to questions about the company, career advice, or anything else you would like to discuss!

This is a great article, Brendan, keep up the good work. Your point on “automation” of savings is something I have always practiced, even in my first job in high school I auto-deposited money into my savings account and continue to do that on top of my 401K, and try to treat them the same as much as I can (i.e. don’t touch it)! Looking forward to meeting you at MAC if you’ll be there for GOLD!